How come America has one of the lowest minimum wage in the developed world?

Question

What economic factors have lead to this?

SOURCE:
http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country

Answer 1

There are very sound economic reasons why you don't want a high minimum wage -- especially in the United States because of our reliance on small business.

First, there are two key points about where jobs come from in the US:

* Small businesses provide 60% of all private sector jobs
* Of those small businesses, 80% have fewer than 10 workers. In other words, just about HALF of all of the jobs in the US are provided by businesses who have fewer than 10 employees.

This is important because there are 3 strong reasons why a higher minimum wage is not a good strategy:

(1) Raising the minimum wage can lead to higher unemployment.

As labor costs rise, those small businesses -- most of whom have fewer than 10 people -- can become unprofitable and the business goes under OR the profit margin shrinks so much that the business owner decides that it's simply not worth the time and energy, and the owner closes up the shop to go become an employee. The only way to avoid that scenario is if the owner starts laying off people. So a firm that used to employ 6 people now employs 5.

(2) Raising the minimum wage would require higher interest rates.

As wages rise, prices will increase in order to cover existing costs. Additionally, we can assume that since people will be taking home a higher paycheck, they will want to purchase more goods -- again pushing prices higher. The value of the dollar decreases.

Additionally, the money supply -- the amount of currency that people have in their bank accounts -- will go up because of the higher wages. Again, the value of the dollar decreases as the supply gets larger.

Now the Fed would have to do something -- you can't let inflation get out of control. Traditionally, the Fed has had two options: raise interest rates or restrict the money supply. However, the Fed can't restrict the money supply in this case because it would actually increase the real minimum wage, amplifying the existing problem. That means that all the Fed can really do is raise interest rates, which makes it much, much harder for businesses to start or expand. You raise interest rates when you want to slow economic growth, which is not good for creating jobs.

(3) Increasing the minimum wage does not necessarily increase your Purchasing Power.

Here's the real kicker: there is absolutely no reason to believe that a higher minimum wage is going to help people make ends meet. When we talk about people being poor, we're not actually saying that they don't have a high enough income -- we're saying that they don't have enough Purchasing Power to obtain the goods and services that they need.

As noted above, firms will have to increase their prices in order to absorb the added cost, as well as to meet increased demand. So someone's wage may have gone up, but their Purchasing Power may actually have gone down in real dollars because inflation makes it harder to buy the same goods and services.

Anyway, I know that's a long answer, but that's some of the economic reasoning behind it. This might be a bit more helpful than the political blame-game that the other users have given you.

Answer 2

I'm going to answer a question with a question. Pre-housing bubble bust (which is almost entirely the government's fault), what was the state of the economy? What was (and is) the TRUE state of the economy in Socialist Europe? What does the minimum wage truly entail? At the end of the day, our prosperity was achieved through laissez-faire economics. This is actually true for most of the world's empires, but as the saying goes: "Those who ignore history are damned to repeat it." The world WILL endure another massive economic depression. No amount of posturing by the Fed can avoid that, only postpone it. Furthermore, a minimum wage eliminates jobs disproportionately to the wages that it increases. In corollary, individuals making minimum wage send off more in taxes because of this suddenly enlargened unemployed group of people. It's a comedic cycle that no one pays attention to because it's all about staying in office.

Answer 3

The minimum wage in the US usually provides about the same same standard of living, using PPP, as the minimum in other developed countries. Because the Republicans have had control of congress for the last 10 years, we have fallen behind. Most Republican oppose minimum wages on principle, believing they distort the economy, and prefer to provided for the working poor using EITC( tax credits for low income families). Democrats like high minimums because they believe by raising the floor they will also raise most wages below the median. So they also think it distorts the economy, but it is a distortion they favor.

Answer 4

The statutory minimum wage is just a base. It is difficult to find anyone who will work for the minimum wage, so the actual minimum wages paid on the US exceed the statutory minimum.

The cost of living in the US is also much lower than the cost of living in many other developed countries. Therefore, to the extent the minimum wage is lower, it still provides a better lifestyle than one would get in Eurpoe, for example.

The US also tends to think that the free market works better than fixing minimum wages by law. As noted above, supply and demand tends to result in actual wages that are higher than minimum wages.

The downside of minimum wages being high is that businesses won't hire people for jobs in the globalized economy we have. They end up shifting jobs to other nations -- like China -- where employees will work for much lower wages.

Answer 5

Minimum wage is a good intention. In reality minimum wage hurts the poor more than any other group: http://www.a2dvoices.com/realitycheck/commentary/minimumwage.html

America does not have low minimum wages. I believe that you will find that many developed countries like Germany and Italy do not have minimum wage. You may also find it interested that many developed countries (that you may consider less capitalistic) have flat taxes rather than progressive income tax rates.

Answer 6

Lowest minimum wages are based on cost of living,to meet a laid down standard of life for people in that category.These people are generally uneducated,unskilled and without a regular employment.There are no unfavorable economic reasons involved.Demand supply of such labor can correct minimum wages at their own but to protect such labor from exploitation,minimum wages are generally higher than the prevailing market rates.

Answer 7

There is no labor party in America. There is only the left and right wing of the corporate class. I agree that people should come before profits.

Answer 8

Actually schuan, it is because of both, Democrats can never agree with Republicans, and the other way around too. You are a perfect example of why a republican would not want to agree with you even if you were right, it is just the way you say it. There needs to be less arguing and more agreement.

Answer 9

We are less socialist and more capitalist. We let the market determine the wage for almost all workers

Answer 10

Democrats